Weather risk management should be part of companies’ overall risk management
In the past, many businesses did not know how to protect their profits from unfavorable weather conditions. However, there is now an increasing awareness and interest in weather risk management tools, as provided by AGCS subsidiary Allianz Risk Transfer (ART), which enable companies to hedge this risk, similar to the way they might do with interest rate movements and foreign currency exchange rates.
The release notes that weather risk management offers a new avenue for companies to create customized responses to the specific weather variables which can affect their business. Using independent weather data, these products are linked to actual fluctuations against pre-agreed weather indices which, when certain criteria are met, can trigger a payment. Crucially, unlike with traditional insurance products, no physical damage is required for a payment to be made to the affected policyholder. Measurable variables such as temperature, rainfall, sunshine, snowfall, and wind form the basis for these risk indices, so a quick payment is triggered automatically when measurements prove certain pre-defined levels for the selected weather variable(s) have been reached.
“However ‘bad’ the weather is, it is no longer a good excuse for disappointing earnings,” explains Karsten Berlage, Global Head of Weather Risk Management at ART. “Stakeholders are increasingly aware of this. While companies cannot be expected to control the weather they are now expected to better control the risk of its financial impact. This can be achieved through weather risk management solutions.”
Availability and access to weather data have improved dramatically over the past decade, further strengthening the argument for strategic weather risk management and enabling protection to be structured even in remote locations around the globe.
Expanding solutions for a broad range of sectors
In the field of agriculture, weather risk management solutions are already protecting the crops of farmers across Africa from drought.
Energy companies — both in the traditional and renewable sectors — are extensively using these solutions to protect themselves against unfavorable seasons and safeguard revenues. Meanwhile, wind farm operators seek protection against low or excessively strong wind to secure cash flow and underpin their financing.
Despite the growing importance of online trade, the retail industry is still highly exposed to weather volatility. Weather risk management solutions can protect retailers from a drop in earnings in the event of customers being unable to go shopping because of heavy rain and snow or changing their demand for seasonal products.
Weather risk products may even be used as marketing promotions. Car manufacturers may entice potential buyers of convertibles with a “sunshine guarantee.” Owners would be protected against a lack of sunny days if they are unable to have the roof down for a more than a predefined period.
A bright forecast
Weather risk management products are already widely used in the United States, where they have become more readily accepted as a standard feature of companies’ overall risk management. In the United Kingdom, and elsewhere in Europe and other parts of the world, the product is still emerging, being used by a growing number of firms to deploy increasingly sophisticated solutions to their business challenges.
Karsten Berlage anticipates “Weather will increasingly be viewed as a core risk to business performance. Therefore, demand for weather risk management solutions should grow significantly in the future with stakeholders able to reap the benefits of better cash flow stability, more accurate budget management, greater earnings consistency and higher risk-adjusted returns.”
— Read more in The Weather Business: How companies can protect against increasing weather volatility (Allianz Global Corporate & Specialty, 2013)
